When you’re applying for almost any type of home improvement loan you’re eventually faced with the question of whether the loan will be a fixed rate loan or whether the interest rate charged will be variable.  The difference between the two types of loans could save you hundreds, if not thousands, of dollars over the life of your home improvement loan.

Let’s first talk about how a typical home improvement loan from a bank or lending institution works.  Let’s say you borrow $10,000 to build a new deck on your home.  You pay back the loan over time, but you also pay a little extra money, called interest, that is agreed upon when the loan is signed.  This interest is essentially the profit that the bank makes for loaning the money to you.  If you borrow $10,000 and agree to pay it back over 5 years (plus interest) then at the end of those five years you may actually have paid $13,000 or more.  Sometimes the rate of interest through the life of the loan stays the same, but sometimes that rate goes up or down and can dramatically affect your monthly payment.

Fixed Rate Home Improvement Loans: When interest rates are low it’s often smart to go with a fixed rate loan because the chances of the rate going up are greater than the changes of them going down.  Lower interest rates mean you can borrow more money and pay less interest, which is obviously a good thing for consumers who want a cheap home improvement loan.  Fixed rate home improvement loans are usually designed so that every monthly payment is exactly the same through the life of the loan.  This is good because it means there won’t be any surprises.  The rate you can get on a fixed rate home improvement loan is often based on your past credit history, whether it’s a secured or unsecured loan and the amount of the loan and payment length.

Variable Rate Home Improvement Loans: Some home improvement loans can have a variable rate of interest which means the interest rate of the loan changes as interest rates in the market place go up and down.  Banks generally like variable interest rate loans because there’s always the chance that interest rates will go up, increasing their profits and your payments on the loan.  So why would you choose a variable rate loan at all?  Banks will often offer a slightly lower rate to entice customers to use them.  Variable rate home improvement loans are often still good loans and can be great ways to fix up your home.  Sometimes a variable rate loan will actually cost much less than a fixed rate loan if the interest rates go down over the life of the loan.

While different home improvement loans offer different payment terms you can sometimes even refinance a home improvement loan if you find the payment terms to be not to your liking.  Whether you get a fixed rate or variable rate home improvement loan is a completely personal choice that depends upon the market conditions of tha time, your individual loan needs and your personal credit history.